The following article deals with the topic “Fiscal Consolidation through Fiscal Rules?” which is currently being discussed at the Global Economic Symposium in Rio. The author intends to enrich the discussion at the symposium with his personal stories and ideas.
In the panel “Fiscal Consolidation Through Fiscal Rules” the panelists discussed different proposals to find a solution for everybody to agree on. But is there some kind of the right thing to do? The perspectives and backgrounds of the panelists were completely different:
- The Amercian way of life, increasing expenses with nearly no limit in hard times to provide growth, that may reduce the dept ratio afterwords.
- An Asian attitude, taking care about to high depts and only the necessary level of social favours.
- The European style, financing wealth via depts and up to now, ignoring existing fiscal rules in terms of dept ratios for years.
Facing the debt crisis in Europe, we have a recent example what might happen if there are no effective rules to fight against increasing debts as well as higher debt ratios than previously agreed upon. In the Eurozone, there have always been two rules for public debts: The total level should not exceed 60% of the GDP and operational dept of the current budget of each state may remain under 3% of GDP. But nobody followed those rules. Either there were too strict, not flexible enough and therefore not very useful, or not in the interest of the governments who were not willing to stick to agreements of former legislations and maybe initiate unpopular measures because of this.
The favorite proposal of the panel as well as the audience was the idea of putting all costs under review, cutting expenses and maybe bundling the allowed debt rate to minus one percent of inflation. The idea off an independent financial review and supervisor committee missed any support.
I totally agree on this because governments normally have no or not only an income problem, but more a problem of expenses. Let me first review the idea of cutting costs: Over the last years and specially increased there expenditure a lot. As the private sector was in a crisis in 2008, governments tried to replace there part in the economy to avoid a GDP shock. Today governments are in trouble because of their high depts. The solution all over the world is to make central banks responsible to solve to problem. So the FED, the Bank of England and the ECB have huge QE-programs, making money cheaper and cheaper. I don’t want to discuss this in detail but in my opinion this is a very bad development, as there are huge allocation problem on the monetary markets and also the core problem will not be solved by this kind of solution.
There is only one way of getting governments budgets balanced again: We all have to reduce wealth programs, our living standards and claims. It’s fact that the increase of expenses in the last 10-20 years has been funded by depts. And this is not about to work forever. People got used to this, they demand good healthcare, pensions, free schools and universities.
This leads me to my second thought about this independent supervisor committee. The idea by itself is good and maybe the most efficient way to rebalance budgets and avoid political gifts. But there is a huge lack of democratic legitimation. We all see the reactions of Greek/Spanish/Portuguese people on those cruel cuts in government spending, tax increases, wage reduction. They perceive Mrs. Merkel as an iron lady, Madame No and Europe’s secret Queen. They do not accept someone telling them they have consumed too much over the last decade and that somebody has to pay the bill now. As far as there is no acceptance and common understanding for such measures, neither independent committees nor brave governments will have success in Fiscal Consolidation.
From the perspective of one of the properly youngest participants at this year’s GES (23), i believe that any proposal on fiscal rules will fail as they had failed all up to now. It’s a fact that somebody has to refinance the current dept in a few years. The whole conflict is just about allocation. Not about allocation between the rich and the poor, meaning either across or within nations. It’s all about consuming now and shifting the payment a few years. That’s nothing a government can solve. No fiscal rules will help here. Till there is not a common understanding in society the generation in charge will live and consume on costs of the young. I’ll have to pay. Your childs have to pay. Also their childs. As they can not vote, this is the even more challenging democratic issue.